Warren Buffett’s Berkshire Hathaway now owns 9.5% of Activision Blizzard (NASDAQ: ATVI) shares. Even in a bear market, Berkshire could profit handsomely from this bet. It’s a calculated gamble that may well pay off. While I’m not an Activision shareholder, it’s not too late for me to make the same bet.
Buffett’s merger arbitrage
Berkshire first invested in Activision in Q4 2021. The stock price had plummeted over 25% after a state lawsuit alleged a sexist culture. The allegations were disturbing and the company’s executives have a lot to answer for. Change was and is still needed. However, Activision owns popular franchises such as Call of Duty, World of Warcraft and Candy Crush. With 150 million monthly active players, Buffett sensed an opportunity to own a good business at a discount. So did Microsoft.
In January, Microsoft announced intentions to buy Activision for $95 per share – a $69bn valuation. It hoped to complete the deal in the first half of 2023.
Following this news, Berkshire loaded up on Activision stock. Its position grew from around $1.1bn to $5.8bn. That is a sizeable position for most but notably less than 1.5% of Berkshire’s portfolio.
This was a merger arbitrage trade. That means buying shares in a company at a discount to the takeover price and selling at a higher price when the deal completes. Amidst uncertainty of whether a deal will go through, the share price can be lower than the takeover price, creating this opportunity. Here’s what Warren Buffett had to say about the position at Berkshire’s 2022 Annual meeting in April:
“Occasionally I’ll see an arbitrage deal and do it. Occasionally it looks like the odds are in our favour, but absolutely we can lose money on that company, fairly large sums of money, depending on what happened if the deal blows up. We don’t know what the Justice Department will do, we don’t know what the EU will do, we don’t know what 30 other jurisdictions will do. One thing we do know is that Microsoft has the money.”
Activision shares trade at just under $78 per share. Based on the current valuation, an investment today could return nearly 22% if the deal go through. Berkshire could make over $1bn.
Not a sure thing
As with all acquisitions, it’s uncertain whether the deal will be approved. The deal will face the Federal Trade Commission, which recently blocked a merger between Nvidia and Arm. That was due to monopoly concerns.
This deal is different, however. Even after an acquisition, Microsoft would not have a monopoly in the gaming industry. Microsoft lags significantly behind Sony, Tencent and Apple for gaming revenues. In fact, Sony’s PlayStation Network has roughly four times more subscribers than Microsoft’s Xbox Game Pass.
That being said, the Activision acquisition would be the largest technology deal of all time, raising antitrust eyebrows internationally.
Calculated risk
A return of over 20% in a year’s time is enticing, especially in this market. Of course Warren Buffett hopes that the deal goes through so Berkshire can make a healthy short-term gain. However, if the deal collapses, Berkshire will own nearly 10% of a company that Buffett already wanted a piece of before the news of any deal.
